Monday, January 27, 2014

The limits of the Big Mac Index: Venezuela with the most expensive or cheapest currency?

Venezuela has a way to test any economic indicator, and The Economist Big Mac Index is no exception. After the jump is the large picture of the world currency overvaluation or undervaluation, and some comments about Venezuela.

All would be fine and dandy except that:
* the big mac price has long ceased to be 45 in Venezuela, it is around 100 last time I had one (though I may have had fries...).
* do you take the exchange rate at 6.3; 11.3; or the soon to be 80? With the first one Venezuela would be as rich as Switzerland or Norway (Bwahahahahah!), with the second one we come closer to average and at 70 it is dirt cheap.
* does it really matter? Soon MacDonald may not be able to find the necessary stuff to make the most basic burgers, not even à la White Castle.....

5 comments:

The Mac Index is indeed hard to apply in Venezuela's multidimensional delusion. There is one index we could use and I don't see anyone using it: a comparison of how many hours a humble employee, say a primary school teacher, has to work to buy a hamburger, a kilogram of meat or pay for one month's rent of a small flat.In Venezuela a teacher would need several months of her salary to pay for one month of a tiny apartment in Caracas.

i agree totally kepler... I use the "earning power index" when talking to my friends or spouse. it makes it more tangible more visceral for some reason. with my spouse, it takes away any of her fears of moving to b with me in Canada, and even better at assuaging her fears of being a minimum wage "lava poceta" (even though that wouldn't happen...im lucky enough to b a well paid electrician, and its hard for her to think in terms of a one-income family)

The value of everything is now lost in the fog of war. In finance, there are established rules in determining value. They largely depend on what state of mind people have, especially how they see their circumstances and how they perceive the future. The war at this time is one of propaganda vs reality and how they influence beliefs of people buying and selling. When there is confusion, people disagree, and there is lots of variation in prices. Then, when the government tries to control prices with threat of prison, the beliefs people have are probably aggravated and the ability of buyers and sellers to find each other is constrained and forced underground. If transactions don't happen or are not public, it's like putting a price on items in an empty shelf!

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